The National Bank of Romania (NBR), which has now cut its rate by 300 basis points since embarking on an easing cycle in July 2013, also narrowed the rate corridor around its standing facilities to plus/minus 2.0 percent from plus/minus 2.25 percent, resulting in the Lombard lending rate being cut to 4.25 percent from 4.75 percent while the deposit rate remains at 0.25 percent.
Noting the downward shift in the inflation path, the central bank also lowered its forecast for inflation to 2.1 percent by the end of 2015 from November's forecast of 2.2 percent, and to reach 2.4 percent by end-2016.
It attributed falling inflation to the fall in oil prices, a persistent negative output gap, lower inflation expectations and the subdued inflation and weak economy in Europe.
Romania's consumer price inflation eased to 0.8 percent in December from 1.3 percent in November, below the bank's target of 2.5 percent, plus/minus 1 percentage point.
Meanwhile, Romania's economy remained on an upward course in the fourth quarter of 2014, with industrial output, retail trade and construction above the third quarter, the bank said. Third quarter Gross Domestic Product expanded by 1.8 percent from the second for annual growth of 3.2 percent, up from 1.4 percent in the previous quarter.
The National Bank of Romania issued the following statement:
"In its meeting of 4 February 2015, the Board of the National Bank of Romania decided:
- To lower the monetary policy rate to 2.25 percent per annum from 2.50 percent starting with 5 February 2015;
- To narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to ±2.00 percentage points from ±2.25 percentage points. Thus, starting 5 February 2015, the interest rate on the NBR’s lending facility (Lombard) will be lowered to an annual 4.25 percent from 4.75 percent, while the deposit facility rate will remain at 0.25 percent per annum;
- To pursue adequate liquidity management in the banking system;
- To keep unchanged the current levels of minimum reserve requirements ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference on 9 February 2015.
The analysis of the latest statistical data points to a further decline in the annual inflation rate, which followed a lower-than-forecasted path and ran below the lower bound of the variation band of the flat target, due to the steeper drop in volatile prices and to the increasingly weak inflation on external markets, overlapping the lingering negative output gap and the ongoing downward adjustment in inflation expectations.
The annual inflation rate fell to 0.83 percent in December 2014, down from 1.26 percent a month earlier. The annual average inflation rate stuck to 1.1 percent in December 2014, while the annual average inflation rate based on the Harmonised Index of Consumer Prices – which is relevant for assessing convergence with the European Union – came in at 1.4 percent, the same as in the previous month.
Looking at the real economy, short-term indicators in October and November 2014 hint at the economy remaining on an upward course during Q4, with both the industrial output volume and the volumes of retail trade and construction works posting positive quarterly changes higher than the Q3 averages. At the same time, the developments in the balance-of-payments current account deficit point to the consolidation of external position sustainability.
The real annual growth rate of domestic currency loans gained momentum, thanks to the pass-through of the successive policy rate cuts onto lending rates on new business to companies and households, also fostered by the easing of money market liquidity conditions. As regards the overall volume of credit to the private sector, it was further negatively affected by the sharper contraction in foreign currency credit (stocks) and by the stepped-up operations to remove non-performing loans from credit institutions’ balance sheets. All these trends contribute to enhancing monetary policy transmission.
In today’s meeting, the NBR Board has examined and approved the quarterly Inflation Report. Compared to the November 2014 forecast, the new quarterly projection shows a lower expected inflation path. Thus, the annual inflation rate is seen coming in at 2.1 percent at end-2015 and at 2.4 percent at end-2016. The downward shift of the inflation path stems primarily from the anticipated steeper year-on-year drop in volatile prices over the short term, mainly on account of the decline in international oil prices, from the persistence of the negative output gap, the consolidation of inflation expectations at lower levels, as well as from the ongoing subdued inflation and weak economic recovery in the euro area and other European countries.
The major risks associated with the current projection relate to the heightened uncertainty surrounding external developments, generated primarily by regional geopolitical tensions, by the situation in Greece and in the euro area, and the growing divergence between the monetary policy stances of major central banks worldwide.
Against this backdrop, the Board of the National Bank of Romania has decided to lower the monetary policy rate to 2.25 percent per annum from 2.50 percent starting 5 February 2015 and to continue to pursue adequate liquidity management in the banking system.
Moreover, with a view to mitigating interbank money market rate volatility and consolidating the transmission of the policy rate signal, the NBR Board has decided to narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to ±2.00 percentage points from ±2.25 percentage points. Thus, starting 5 February 2015, the interest rate on the NBR’s lending facility (Lombard) will be lowered to an annual 4.25 percent, while the deposit facility rate will remain at 0.25 percent per annum.
The NBR Board has also decided to keep unchanged the current levels of minimum reserve requirement ratios on liabilities of credit institutions.
Based on currently available data, these decisions are meant to ensure price stability over the medium term, so as to support economic growth, including via the restoration of confidence and the sustainable recovery of lending.
The NBR Board reiterates that the consistent implementation of an adequate macroeconomic policy mix and the step-up in structural reforms, along the lines of the external financing arrangements, together with sustainable financial intermediation and an appropriate remuneration of bank deposits are pivotal to consolidating the Romanian economy and enhancing its resilience to external shocks.
The NBR is restating that the adequate use and dosage of all its available tools, amid close monitoring of domestic and global economic developments, will ensure the achievement of the overriding objective of maintaining price stability over the medium term, along with preserving financial stability.
The new quarterly Inflation Report will be presented to the public in a press conference on 9 February 2015, when the calendar of NBR Board meetings dedicated to monetary policy issues for the next 12 months is to be announced."
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